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2022 (3) TMI 674 - HC - Income TaxAddition on account of arm s length price ALP adjustments - HELD THAT - Addition on account of ALP Adjustment in the petitioner s-assessee s case the same cannot give rise to any liability as the petitioner-assessee has executed an Advance Pricing Agreement APA . As a matter of fact the APA was executed by the petitioner-assessee on 04.12.2019. Our attention was drawn by Mr Kalra to Annexure A-1 appended the an interlocutory application filed by him i.e. CM No.38352/2021 which is a copy of the order passed by the Transfer Pricing Officer (TPO) u/s 92CA(3) of the Act concerning the AY in issue i.e. AY 2018-2019. The operative part of the said order which is dated 26.07.2021 reads thus - 5. Accordingly No adverse inference is drawn in respect of arm s length price of the International transaction for F.Y. 2017-2018 pertaining to A.Y. 2018-2019. Therefore any likelihood of tax liability on this score seems unlikely. Addition on account of disallowance of foreign exchange loss on account of Marked to Market Losses - HELD THAT - AO has in fact not made any estimation as to what is the foreign exchange fluctuation loss (which includes Marked to market loss) that he is likely to disallow. The only aspect that the AO has touched upon to justify the tax liability under this head is that an addition of 11 crores was made in AY 2016-2017 concerning Marked to market losses. After adverting to this aspect the AO has let the issue hang in the air as he has not gone on to indicate an estimated amount which he is likely to disallow in AY 2018-2019 on account of foreign exchange fluctuation loss which includes Marked to market losses and therefore the additional tax burden it would result in imposing on the petitioner assessee under this head. Addition on account of unearned revenue - HELD THAT - In this case as well it is not as if the petitioner/assessee is not offering unearned revenue for tax; it is only on account of accounting policy followed consistently that unearned revenue is offered for tax in the year in which services are rendered and/or goods are sold. Thus the transaction in effect being revenue neutral it does not affect the interest of revenue. The upshot of the aforesaid discussion is that the estimation made by the AO that because there is a likelihood of the petitioner assessee having to bear a tax liability of 500 crores in AY 2018-19 and therefore the refund sought of 349, 41, 45, 020/- ought to be denied is not founded on rational and cogent grounds. AO as rightly argued by Mr. Kalra has not taken into account the financial wherewithal of the petitioner assessee. It is the petitioner s assessee s claim that at present its net worth as on 31.03.2021 is nearly 1873.80 crores. According to us it is not as if the petitioner assessee does not have the necessary financial wherewithal to defray the estimated tax liability if it arises qua the AY in issue i.e. AY 2018-2019. In any event besides the refund that the petitioner assessee seeks in the present proceedings there is as indicated above an amount equivalent to approximately 214 crores which is still locked up with the respondent assessee. Messrs Bhatia and Chandra have indicated to us that the assessment order for AY 2018-19 is likely to be passed shortly and in any case no later than 31.03.2021.Given the aforesaid facts and circumstances in any event the respondents revenue are secure if not for more amount at least for 214 crores towards refund which is the amount that remains locked up; on which we are told no decision has been taken by the respondents revenue as yet - we are inclined to allow the writ petition.
Issues Involved:
1. Legality of the order dated 28.04.2020 under Section 241A of the Income Tax Act, 1961 for AY 2018-2019. 2. Compliance with the court's directions in the previous judgment dated 18.02.2020. 3. Justification for withholding the refund amounting to ?349,41,45,020/-. Detailed Analysis: 1. Legality of the Order Dated 28.04.2020: The petitioner challenged the order dated 28.04.2020, issued by the respondents-revenue under Section 241A of the Income Tax Act, 1961, which withheld a refund of ?349,41,45,020/- for AY 2018-2019. The petitioner argued that the order was erroneous and unsustainable in law. The court examined the impugned order and found that the Assessing Officer's (AO) conclusion was based on potential adjustments under three heads: arm's length price (ALP) adjustments, disallowance of foreign exchange loss on account of 'Marked to Market Losses,' and addition on account of unearned revenue. 2. Compliance with Court's Directions in Previous Judgment: In the first round of litigation, the court had issued specific directions on 18.02.2020 for the respondents to follow while reconsidering the refund withholding. These directions included: - Estimation of probable additions in the scrutiny assessment proceeding. - Quantum of additions and disallowances and their likely tax impact. - Financial standing of the petitioner-assessee and its ability to meet tax demands. The court noted that the AO failed to adhere to these directions. Specifically, the AO did not provide a cogent estimation of the foreign exchange fluctuation loss or the tax impact of disallowances. The court also observed that the AO did not consider the financial wherewithal of the petitioner-assessee. 3. Justification for Withholding the Refund: The court analyzed the three heads under which the AO justified the withholding: i. ALP Adjustments: The court found that the petitioner-assessee had executed an Advance Pricing Agreement (APA) on 04.12.2019, which nullified any potential tax liability under this head. The Transfer Pricing Officer's (TPO) order dated 26.07.2021 confirmed no adverse inference regarding the ALP of international transactions for AY 2018-2019. ii. Disallowance of Foreign Exchange Losses: The AO did not make any specific estimation of the foreign exchange fluctuation loss for AY 2018-2019, merely referencing an addition of ?11 crores in AY 2016-2017. The court found this insufficient to justify the withholding. iii. Unearned Revenue: The AO estimated a significant addition based on unearned revenue and advances from customers, totaling approximately ?1050 crores. However, the court noted that the petitioner-assessee had consistently followed an accounting policy of showing unearned revenue as a current liability and offering it for tax in the year services were rendered or goods sold. This practice was supported by previous orders of the Dispute Resolution Panel (DRP) and was not disputed by the respondents. The court emphasized the principle of revenue neutrality, highlighting that the consistent accounting policy did not adversely affect the revenue's interests. Conclusion: The court concluded that the AO's estimation of a potential tax liability of ?500 crores for AY 2018-2019 was not based on rational and cogent grounds. The AO also failed to consider the financial wherewithal of the petitioner-assessee, whose net worth was nearly ?1873.80 crores as of 31.03.2021, and additional refunds amounting to ?214.86 crores were due for various assessment years. Given these findings, the court set aside the impugned order dated 28.04.2020 and directed the respondents to release the refund of ?349,41,45,020/- to the petitioner-assessee. The court clarified that its observations were specific to the tenability of the order under Section 241A and would not impact the framing of the assessment order for AY 2018-2019.
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